Dropping Coverage

September-quarter results remain depressed but trends are starting to improve

Largo Initiates Strategic Review – What does that mean?

Production improvements offset by falling prices – PO lowered

Michael Heim

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Basic Materials

Metals & Mining

Largo Inc.

<p><strong>Sales and realized prices were down.&nbsp;</strong>Results for the most recent period fell below our expectations for various reasons. Production volumes (which were preannounced on 1/24/23) were 2,004 tonnes in 2022-4Q, a 31% decline relative to the 2022-3Q. In the earlier press release, management explained that a mining contractor transition in September led to a lower quantity of mined material available. Low inventories made it difficult to offset the impact of corrective maintenance in November and heavy rain in December. Vanadium sales for the quarter were 2,774 tonnes, flat with the previous quarter as the company sold from inventory. Sales were below the same period last year. This, of course, was expected given the preannouncement. Of bigger concern was a sharp drop in the price Largo received for each pound of vanadium equivalent sold. This becomes especially apparent when compared to the average benchmark vanadium price in Europe. Traditionally, Largo has received a premium price to the benchmark to reflect the higher purity of its vanadium and a higher concentration of ferrovanadium. Ferrovanadium, which usually trades at a premium to vanadium, fell below vanadium prices.&nbsp; Realized prices also vary depending on where the vanadium is sold and the timing of sales. Deliveries may occur months after sales agreements have been completed meaning that realized prices trail benchmark prices. That appears to have been the case with benchmark vanadium prices rising in the fourth quarter.<br />
   </p>
<table border="1" style="border-collapse: collapse;width: 726px;height: 108px">
<tbody>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">
         </td>
<td style="width: 124px;height: 18px">2022-4Q</td>
<td style="width: 113px;height: 18px">2021-4Q</td>
<td style="width: 111px;height: 18px">2022-3Q</td>
<td style="width: 130px;height: 18px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Vanadium equiv. prod. (tonnes)</td>
<td style="width: 124px;height: 18px">2,004</td>
<td style="width: 113px;height: 18px">2,003</td>
<td style="width: 111px;height: 18px">2,906</td>
<td style="width: 130px;height: 18px">2,004</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Vanadium equiv. sales (tonnes)</td>
<td style="width: 124px;height: 18px">2,774</td>
<td style="width: 113px;height: 18px">2,899</td>
<td style="width: 111px;height: 18px">2,796</td>
<td style="width: 130px;height: 18px">2,774<br />
         </td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Realized price per lb.</td>
<td style="width: 124px;height: 18px">$7.77</td>
<td style="width: 113px;height: 18px">$7.88</td>
<td style="width: 111px;height: 18px">$8.80</td>
<td style="width: 130px;height: 18px">$9.50</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Benchmark price per lb.</td>
<td style="width: 124px;height: 18px">$8.50</td>
<td style="width: 113px;height: 18px">$8.30</td>
<td style="width: 111px;height: 18px">$8.23</td>
<td style="width: 130px;height: 18px">$8.75</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Differential price per lb.</td>
<td style="width: 124px;height: 18px">$(0.73)</td>
<td style="width: 113px;height: 18px">$(0.42)</td>
<td style="width: 111px;height: 18px">$0.57</td>
<td style="width: 130px;height: 18px">$0.75</td>
</tr>
</tbody>
</table>
<p><strong>Costs were up.</strong> Operating costs, which have been rising due to higher cost of production materials such as fuel, ammonium sulfate and sodium carbonate, continued to rise in the fourth quarter. The change in cost per unit produced was especially noteworthy. The factors causing a drop in production volumes did not lead to lower production costs meaning costs per unit rose sharply. Take a look at production costs per unit which rose 67% quarter over quarter. Management has put a priority on controlling operating costs and expects costs in future quarters to decline. We would also point out that non-operating costs also remain high, although they have eased since the third quarter. Some of these costs are associated with the planning stage of converting processing operations to produce ilmenite. We had hoped those costs would start to ease by the fourth quarter.</p>
<table border="1" style="border-collapse: collapse;width: 712px;height: 129px">
<tbody>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">
         </td>
<td style="width: 130px;height: 18px">2022-4Q</td>
<td style="width: 117px;height: 18px">2021-4Q</td>
<td style="width: 108px;height: 18px">2022-3Q</td>
<td style="width: 109px;height: 18px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Production costs per lb.</td>
<td style="width: 130px;height: 18px">$7.09</td>
<td style="width: 117px;height: 18px">$5.33</td>
<td style="width: 108px;height: 18px">$4.24</td>
<td style="width: 109px;height: 18px">$4.70</td>
</tr>
<tr style="height: 21px">
<td style="width: 248px;height: 21px">Conversion costs per lb.</td>
<td style="width: 130px;height: 21px">$0.56</td>
<td style="width: 117px;height: 21px">$0.65</td>
<td style="width: 108px;height: 21px">$0.28</td>
<td style="width: 109px;height: 21px">$0.30</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Distribution costs. per lb.</td>
<td style="width: 130px;height: 18px">$0.57</td>
<td style="width: 117px;height: 18px">$0.37</td>
<td style="width: 108px;height: 18px">$0.44</td>
<td style="width: 109px;height: 18px">$0.44</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Depreciation costs per lb.</td>
<td style="width: 130px;height: 18px">$1.49</td>
<td style="width: 117px;height: 18px">$1.45</td>
<td style="width: 108px;height: 18px">$0.88</td>
<td style="width: 109px;height: 18px">$0.90</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px">Professional, Consulting, etc. (1,000)</td>
<td style="width: 130px;height: 18px"> $5,735</td>
<td style="width: 117px;height: 18px"> $4,980</td>
<td style="width: 108px;height: 18px"> $7,246</td>
<td style="width: 109px;height: 18px"> $3,000</td>
</tr>
<tr style="height: 18px">
<td style="width: 248px;height: 18px"> Other G&amp;A (1,000)</td>
<td style="width: 130px;height: 18px">$3,454</td>
<td style="width: 117px;height: 18px">$2,144</td>
<td style="width: 108px;height: 18px">$4,108</td>
<td style="width: 109px;height: 18px">$4,000</td>
</tr>
</tbody>
</table>
<p>&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-</p>
<p><strong>Bottom line results reflect a write-down and start-up costs.<span style="font-weight: normal"> As one would expect, lower volumes combined with lower-than-expected pricing and higher-than-expected costs led to disappointing bottom line results. Results were also negatively affected by a $6.4 million write-down of battery components inventory in the fourth quarter. In addition, the company recorded $8.1 million in technical start-up costs. The company does not report adjusted EBITDA or net income like many of its peers. However, we have provided an estimate of adjusted EBITDA and net income excluding nonrecurring items and share-based compensation.&nbsp;</span></strong><strong><span style="font-weight: normal">&nbsp;Adjusting for these items, which were not accounted in our modeling, would indicated that Largo would have been cash flow positive and earnings breakeven in the fourth quarter.</span></strong></p>
<table border="1" style="border-collapse: collapse;width: 711px;height: 113px">
<tbody>
<tr style="height: 18px">
<td style="width: 243px;height: 18px">
         </td>
<td style="width: 123px;height: 18px">2022-4Q</td>
<td style="width: 114px;height: 18px">2021-4Q</td>
<td style="width: 106px;height: 18px">2022-3Q</td>
<td style="width: 125px;height: 18px">Noble Est.</td>
</tr>
<tr style="height: 18px">
<td style="width: 243px;height: 18px">EBITDA (1,000)</td>
<td style="width: 123px;height: 18px">$(6,143)</td>
<td style="width: 114px;height: 18px">$5,456</td>
<td style="width: 106px;height: 18px">$(2.698)</td>
<td style="width: 125px;height: 18px"> $14,341</td>
</tr>
<tr style="height: 19px">
<td style="width: 243px;height: 19px">Net Income (1,000)</td>
<td style="width: 123px;height: 19px"> $(15,636)</td>
<td style="width: 114px;height: 19px"> $5,140</td>
<td style="width: 106px;height: 19px"> $(2,601)</td>
<td style="width: 125px;height: 19px"> $10,122</td>
</tr>
<tr style="height: 22px">
<td style="width: 243px;height: 22px">Earnings Per Share</td>
<td style="width: 123px;height: 22px"> $(0.24)</td>
<td style="width: 114px;height: 22px"> $0.08</td>
<td style="width: 106px;height: 22px"> $(0.04)</td>
<td style="width: 125px;height: 22px"> $0.16</td>
</tr>
<tr>
<td style="width: 243px">Adjusted EBITDA</td>
<td style="width: 123px">$9,297</td>
<td style="width: 114px">$0,468</td>
<td style="width: 106px">$(2,698)</td>
<td style="width: 125px">$14,341</td>
</tr>
<tr style="height: 18px">
<td style="width: 243px;height: 18px">Adjusted Net Income (1,000)</td>
<td style="width: 123px;height: 18px">$(0.196)</td>
<td style="width: 114px;height: 18px"> $10,128</td>
<td style="width: 106px;height: 18px"> $(2,907)</td>
<td style="width: 125px;height: 18px"> $10,122</td>
</tr>
<tr style="height: 18px">
<td style="width: 243px;height: 18px">Adjusted EPS</td>
<td style="width: 123px;height: 18px"> $(0.00)</td>
<td style="width: 114px;height: 18px"> $0.15</td>
<td style="width: 106px;height: 18px"> $(0.05)</td>
<td style="width: 125px;height: 18px"> $0.16</td>
</tr>
</tbody>
</table>
<p><strong><span style="font-weight: normal"><strong>Despite near-term results, there are plenty of reasons to be optimistic about Largo&#8217;s future.</strong> Chief among these is a rise in vanadium prices since the end of the year. Benchmark prices as of March 3rd had risen to $10.78 per pound, up from an average price of $8.50 in the fourth quarter. Aerospace demand for vanadium has returned to pre-pandemic levels and demand for vanadium for batteries has risen from 1% of vanadium demand to 6% in 2022 and are expected to climb to 10% in 2023. Some sources project vanadium demand for batteries doubling each the next several years. On the operating side, things should also improve. </span><br />
  </strong>Management indicates that mining operations have returned to normal levels which should lead to increased vanadium sales.<strong>&nbsp;</strong><strong><span style="font-weight: normal">Largo expects to begin producing Ilmenite by the end of the second quarter which will provide a new source of revenue. We expect consulting and construction costs associated with the project to abate in upcoming quarters. </span></strong><strong><span style="font-weight: normal">A renewed emphasis on costs may help results.&nbsp;</span></strong></p>
<p><strong><span style="font-weight: normal"></span></strong><strong><span style="font-weight: normal"><strong>Don&#8217;t ignore near-term results, but keep a focus on company developments.</strong> Largo is a special company that could see increased cash flow due to its unique ability to provide high quality vanadium for aerospace and vanadium batteries. Its movement into ilmenite and potentially titanium dioxide could accelerate growth. A joint venture to manufacture and sell vanadium batteries in Europe and Africa is at the early stages of development. We continue to believe the long-term prospects for Largo and its stock price remain favorable and reiterate our Outperform rating and $11.00 price target.</span><br />
  </strong></p>


Largo Inc. (LGO)

Results disappointing but future remains bright.

Rating: Log in to view

Dropping Coverage (LGO)

September-quarter results remain depressed but trends are starting to improve (LGO)

Largo Initiates Strategic Review – What does that mean? (LGO)

Production improvements offset by falling prices – PO lowered (LGO)

Inbox Intel from Channelchek.